Modern Monetary Theory and New Monetary Economics

June 17th, 2011

Elevating and rewriting this from what I wrote in the comments. Thanks to bkmacd for prompting it by coming back at me on some issues.

Are long-term government bonds a gift to bankers? Paying them interest to hold risk-free assets?

His key points, and my replies:

Whether or not you personally feel that taking on one type of risk versus another is worth being compensated for has little to do with whether a premium will exist for said risk.

Just because investors — mostly “bankers” in this market — inevitably demand a higher return for the reduced liquidity/”risk” of long bonds, does that mean that government should fulfill/supply that demand? “Tough luck. Hold dollars.” Would we have a more efficient market and more (widely) prosperous system, less distorted by Fed interest-rate machinations? It sure seems like it would remove one method whereby money moves to the top.

going full bore the other way and stating that issuance of long debt by the treasury is an intentional gift to the renter class is equally an act of logical absurdity.

“Intentional”? Je ne sais pas. I tend to wonder whether economists/financiers actually understand money economies well enough to engineer such a conspiracy. (And of course I tend to question conspiracy theories in general, given the general level of human incompetence.)

But that doesn’t mean that the bond-based system doesn’t have the effect that I and Galbraith describe, or that the winners in that system don’t actively or even frantically maintain it for that (semi-conscious?) reason.

there could be some other value to having long term default risk free debt obligations (to appropriately match assets and liabilities)

Yes, it’s possible that the dynamic system that exists with government bond issuance/manipulation/markets yields greater prosperity than a dollars-only system would. But:

1. Wider prosperity?

2. I don’t know if there’s any way we could know that, even via weather-system style dynamic modeling of the type that is, sadly, barely on the horizon in the economics dodge. (Interestingly, Steve Keen in his workmanlike, accounting-based approach, seems to be getting closer, faster, than the seemingly sophisticated Santa Fe Institute gang.)

I’m seeing a really close parallel here to the old “New Monetary Economics” that Tyler gets so gushy about. The NMEer’s notion is that we should eradicate government money, so the only money-like things are private financial instruments. Its stronger proponents claim that it would eradicate the business cycle! (Which I prefer to call the financial cycle.) I think they’re on the fully-loony end of the “free markets will solve everything” spectrum.

MMT is semi-opposite — government only issues dollars, no debt. Is it equally utopian? No, because:

1. It envisions management by government, rather than magical, Panglossian equilibrium via the markets. (See #3.)

2. It explicitly addresses the distribution issues that have been systematically excluded from neoclassical theorizing, which very issues might be the primary cause of financial cycles (at least the big ones, the long-term culminations).

3. Its proponents have enunciated a clear countercyclical automatic stabilizer policy to implement it that addresses the political problem of politicians implementing real-time discretionary fiscal policy: a guaranteed employment system. (The issue they haven’t solved, to my knowledge: what is the political method whereby the government employment wage is set?)


  1. Clonal Antibody
    June 17th, 2011 at 08:52 | #1


    I think you are getting a somewhat utopian view of MMT. MMT itself, is nothing but a more accurate description of how Fiat Currency works in a modern industrial society. The logical outcome of accepting the basic premises of MMT is that monetary policy will be ineffective at affecting economic change, and that the government has to rely upon fiscal policy to affect that change.

    The reason you get the utopian view of MMT is that almost all of the public proponents of MMT are “progressives.” I believe, that left to its own, modern money, in the absence of effective regulation and effective fiscal policy (the situation as it exists today), will inevitably lead to extreme wealth disparities. Given that most monetary savings come from the wealthy, Tsy’s will enrich the wealthy at the expense of the poor, unless there are upper limits to the amount of Tsy’s that can be owned by an individual, and none by any corporate entities. That is because, the wealthy have the means to multiply the corporate entities, and if the corporations are treated as individuals separate from their owners, then the wealth transfer occurs via the corporations acting as the intermediaries.

    Wealth disparities are an inevitability in free unregulated markets. This comes through two mechanisms – one via a Botzmann-Gibbs type energy transfer model, and the second through the existence of the time value of money (or monetary interest, economic rent, or in other words usury) and from that transfer of wealth occurs through the Pareto distribution mechanism. I have provided some links in my post at

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